“And this is precisely where we find us. A monstrous crisis, threatening the whole Western World, that is caused by growing excessive bank exposures to what was officially ex-ante perceived as not risky, and growing bank underexposures to what is officially perceived as risky.”
(Re: Letter to FP Comment, National Post, Global financial watchdog toothless, John Greenwood, Jan. 13)
By Per Kurowski
Canada's former prime minister Paul Martin opines that the Financial Stability Board (FSB) and presumably the Basel Committee for Banking Supervision (BCBS) too, need a lot more resources.
So does Alan Alexandroff, a professor at the University of Toronto's Munk School of Global Affairs, who is quoted saying, "They need a lot more worker bees, there are very few actual permanent people - this has to be a real problem."
On the surface they are both right, but that assumes the FSB and BCBS know what they are doing. Which they don't.
The fundamental element of all bank regulations emanating from the Basel Committee is the capital requirements for banks based on perceived risk of default: The higher the perceived risk, the higher the capital and the lower the perceived risk, the lower the capital. Though it sounds so logical it is in fact what has created the current crisis - first by equating ex-ante perceived risk to ex-post real risk, and second and foremost, by given incentives to the banks to exaggerate the following of those perceptions.
By allowing the banks to hold extremely little capital when lending or investing in something officially perceived as not risky, like triple-A-rated securities and infallible sovereign, the regulators permit the banks to earn much more on their equity and therefore induce the banks to dangerously overcrowd the safe havens. And on the contrary, by requiring the banks to hold much more capital when lending to the officially perceived as risky, like the unrated small businesses and entrepreneurs, the regulators impede the banks from earning much on their equity and therefore hinder the exploration of the more risky but also prospectively more profitable bays.
One thing is for the banks rationally following the credit ratings and another, quite different, is for these to follow the signs the ratings emit, after having taken the hallucinogens ordered by the Basel Committee regulators.
And this is precisely where we find us. A monstrous crisis, threatening the whole Western World, that is caused by growing excessive bank exposures to what was officially ex-ante perceived as not risky, and growing bank underexposures to what is officially perceived as risky.
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Per Kurowski, a former executive director at the World Bank (2002-2004), Rockville, Md.
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